UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the year ended February 29, 2000
Commission File Number 0-22382
SECTOR COMMUNICATIONS, INC.
(Name of small business issuer in its charter)
Nevada 56-1051491
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
7601 Lewinsville Road, Suite 250, McLean, Va. 22102
(Address of principal executive office)
(703) 761-1500
(Issuer's Telephone Number)
Securities Registered Pursuant of Section 12(b) of the Act: None
Securities Registered Pursuant of Section 12(g) of the Act:
Common Stock, $0.001 Par Value
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Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B in this form, and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment of
this Form 10-KSB. [ ]
The issuer had operating revenues of $1,190,418 for the year ended February 29,
2000.
As of May 15, 2000, there were 17,193,805 shares of the issuer's common stock
outstanding. The aggregate market value of the 15,508,705 shares of the issuer's
voting stock held by non-affiliates was $2,481,393 based on the last price of
$0.16 on that date as reported by National Association of Securities Dealers
Over The Counter Bulletin Board (OTC BB) Stock Market. The sum excludes the
shares held by officers, directors, and stockholders whose ownership exceeded 5%
of the outstanding shares atay 15, 2000, in that such persons may be deemed
affiliates of the Company. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
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SECTOR COMMUNICATIONS, INC.
FORM 10-KSB
February 29, 2000
PART I........................................................................3
ITEM 1. Business..............................................................3
ITEM 2. Properties...........................................................11
ITEM 3. Legal Proceedings....................................................12
ITEM 4. Submission of Matters to vote of Security Holders....................14
PART II......................................................................14
ITEM 5. Market for Common Equity and Related Stockholder Matters.............15
ITEM 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................16
ITEM 7. Financial Statements.................................................24
ITEM 8. Changes In and Disagreements With Accounting and
Financial Disclosure............................................25
PART III.....................................................................25
ITEM 9. Directors, Executive Officers, Promoters, and Control
Persons: Compliance With Section 16(a) of the Exchange Act........25
ITEM 10. Executive Compensation..............................................28
ITEM 11. Security Ownership of Certain Beneficial Owners and Management......29
ITEM 12. Certain Relationships and Related Transactions......................31
PART IV......................................................................32
ITEM 13. Exhibits and Reports on Form 8-K................................ ...32
SIGNATURES...................................................................33
EXHIBIT INDEX................................................................34
2
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PART I
ITEM 1. Business
OVERVIEW
Sector Communications, Inc. ("the Company") was incorporated in the state of
Nevada on March 19, 1990, and presently acts as a holding company. The Company's
principal holding is Sector Bulgaria. The Company had revenues of $1,190,418 for
the year ended February 29, 2000, derived from the businesses outlined in this
filing.
Sector Bulgaria
---------------
Global Communications Group, Inc. (Global) was incorporated in the state of
Texas in 1993. A branch of the company was registered in the Republic of
Bulgaria subsequent to the signing of a five (5) year Joint Activity Agreement
("JAA") with Bulgaria's government-owned state telecommunications monopoly, the
Bulgarian Telecommunications Company-PLC (the "BTC"), on January 26, 1994. On
February 14, 1997, the Company entered into a new ten (10) year JAA with the
BTC. As part of this new agreement, a new wholly-owned, Bulgarian subsidiary
company, Sector-Bulgaria, EOOD (hereinafter referred to as "Sector BG") was
created under which all business is now being done.
The JAA called for Sector BG and the BTC to unite their efforts in order to
provide substantially upgraded telecommunications services to the hotel and
resort industry in the country. As a well developed part of the national
economy, this industry sector is playing a strategic role in Bulgaria's rapid
conversion from central planning and state ownership to a more privatized and
market-driven economy.
The JAA identifies two basic needs that Sector BG's activities must address in
order to meet the demands of its customers:
o Provide direct, automatic, international dialing to the guests of
client hotels;
o Deliver upgraded local telephone service to individual business
customers through the installation of optical fiber cabling and
high-speed digital transmission equipment.
In addition, Sector BG has undertaken the challenge to provide complete
equipment upgrades at the customers' premises through the installation of
state-of-the-art digital PBXs, call accounting systems, new telephone sets and
other services.
Since early 1995, Sector BG has provided telecommunication services to a select
group of hotels in the Bulgarian capital of Sofia and in Plovdiv, the country's
second largest city and a traditional fair and exhibition center. Sector BG has
constructed five optical cable routes in Sofia with a total length of 12
kilometers creating an infrastructure that is able to support future additional
customers and further expansion.
3
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Services Provided, Markets and Overall Strategy
-----------------------------------------------
Sector Bulgaria currently operates in the Republic of Bulgaria, a country with a
population of approximately 8,775,000 and a total area of 110,910 square
kilometers (slightly larger than the state of Tennessee). It is well known among
tourist operators, having the unique combination of natural resources,
historical past, traditional architecture and fine cuisine.
Bulgaria possesses an almost unbroken line of beautiful beaches along its 300
kilometer Black Sea coast. Hundreds of hotels are clustered around the two
biggest cities, Varna and Bourgas, in several resort areas - St. Constantin,
Golden Sands and Albena to the north and Sunny Beach, Elenite and Dyuni to the
south. A three to four hour drive transfers the tourist to Alpine surroundings
in the mountain resorts of Pamporovo and Borovetz - well known ski centers in
Western Europe.
The capital of Bulgaria, Sofia, is a large industrial and business center at the
foot of the Vitosha mountain - a picturesque natural park and a convenient ski
center half an hour away from the city. Plovdiv, Bulgaria's second largest city,
has become an international fair and exhibition center with major events in the
spring and autumn and many other events throughout the year. Varna and Bourgas
are industrial and tourist centers with ports on the Black Sea.
There are two characteristic aspects of the Bulgarian telecommunication
infrastructure: the heritage of the communist past and the recent tendencies to
modernization. In the early nineties, democratic Bulgaria inherited from the
former totalitarian communist state a telecommunication infrastructure with
technically obsolete, poorly maintained and worn out electromechanical switching
systems. Long distance transmission was analog, based on antiquated FDM
multiplex systems and microwave relays. The local loop was in no better
condition. The only telephone instrument in use was the ubiquitous rotary dial
phone.
There were great anomalies and discrepancies between the general statistics data
and the actual network development and service quality. The 1995 CIA World Fact
Book reports that Bulgaria's telephone system consists of approximately
2,600,000 telephones or 29 phones per 100 persons, that 67% of the households in
Sofia have telephones, that automatic telephone service is available in most
villages, that two thirds of the lines are residential etc. These ostensibly
attractive statistics disguise the severe problems of Bulgaria's antiquated
telecommunication system. The waiting list for telephone service in the bigger
cities is still hopelessly long, the quality of transmission poor, the static
and distortion in local loop circuits renders them useless for anything but
voice grade and low bit-rate data services.
4
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Growth and socioeconomic change have come about in Bulgaria in the aftermath of
the end of the communist regime. New and increased demands are being placed upon
Bulgaria's inadequate telecommunications infrastructure placing additional
stress on the Bulgarian public telephone operator's ability to supply its users
with the required capacity. This in turn, is causing the users to operate in an
environment which lacks critical communications capabilities. This situation is
further exacerbated by the poor financial health of Bulgaria's balance of
payments and hard currency reserves which are inadequate to invest in and
modernize such important areas as its telecommunications infrastructure.
A typical example of Bulgaria's attempt to modernize its telecommunications
infrastructure is the Digital Overlay Network (DON) project of the BTC. Its
major goal is to significantly upgrade the national long distance network by
creating a digital transmission and switching overlay of the existing analog
environment thus creating the backbone of further network upgrades.
Even with the completion of the DON, compared to western standards, Bulgaria
lags considerably behind. For Bulgaria's most visible and demanding users, such
as international four and five star rated hotels, large sea and mountain resorts
with traditional international business and tourist flow, foreign and domestic
companies, embassies, and trading houses, requiring constant and efficient
access to international and long distance communications, the inability to offer
sufficient quality in all segments of the connection, be it switched-voice,
facsimile or data, mean a potential loss of business revenue, inability to
obtain timely critical business and other information, and a frustrated user
population.
Sector BG currently has contracts to provide services to a select group of
hotels in Sofia and Plovdiv. Sector BG has constructed five optical fiber cable
routes in Sofia with a total length of 12 kilometers (6 fibers), creating an
infrastructure for future cost effective connection of additional customers and
further expansion of its telecommunication operations as well as the possibility
of providing additional services such as cable TV over its network.
Sector BG offers to its customers the following basic services:
o upgrading of the local loop to optical and direct connection to the
international gateway switch through the Sector BG operated private
network;
o worldwide dialing access;
o complete telecommunication equipment upgrade in the customer's
premises including, installation of new modern PBX(s), call accounting
systems, new telephone sets, and other services.
5
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Sector BG's strategy is to expand the optical fiber cable construction in Sofia
and Plovdiv and to provide international and national long distance direct
dialing to additional hotels, western businesses, banks and embassies. New
services will also be developed to enrich and diversify the types of products
available to the customer, e.g. cable, TV, debit card calling, Internet access,
Reutersaccess, credit card validation, etc., based on the near-infinite
transmission capacities of the optical fiber and related equipment. This
strategy and the implementation of such an expansion of the network services is
highly dependent upon the ability of the company to secure adequate financing
and contract with new customers -- the assurance of which is highly uncertain.
Sector BG also expects to extend these services to the major Black Sea resort
areas clustered around the cities of Varna and Bourgas, as well as the popular
mountain ski centers of Borovetz and Pamporovo.
Sector BG's customers, present and/or potential, represent the most lucrative
market segments: 1) the hotel and resort industry, and 2) business users. Both
of these markets demand a high quality of service (QoS) and at the same time are
able to afford the higher premiums to procure these services.
Sources and Availability of Materials
-------------------------------------
The materials and vendors necessary for Sector BG to continue operations are
available from many sources. Sector BG foresees no shortage of supplies or
difficulties in acquiring materials and vendors necessary to conduct its
business as presently conducted.
Sector BG relies heavily on its own expertise. Three local and one UK-based
subcontractor companies are retained to provide certain technical equipment and
services including:
o engineering support for proprietary computer and telecommunications
equipment;
o cable route surveys, coordination with the BTC and local authorities
on permit and license issues, construction and laying of the optical
fiber cable including testing and documentation;
o call logging equipment and billing service support;
o digital transmission telecommunication equipment.
All three Bulgarian companies are leaders in their specific business domains and
Sector BG has a well established relationship with each. Should it be necessary
to obtain new or additional subcontractors, Sector BG has an adequate number of
alternative local and international equipment and service vendors. There exist,
however, many political and regulatory risks in Bulgaria which could seriously
impact the ability of the Company to obtain required contractual services or to
retain its own employees.
6
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Description of the Network
--------------------------
Sector BG has installed five Mitel SX 2000 Light PBXs in five hotels in the
cities of Sofia and Plovdiv and has expanded or upgraded most of the remaining
PBXs in the remaining hotels to which Sector BG provides service. Call logging
and accounting equipment and interfaces to the hotel information systems are
provided to every customer. Five PBXs, four Mitel SX 2000 and one Northern
Telecom Meridian 1, are connected via optical fiber directly to Sector BG's
Concentrator Tandem in Sofia. The remaining hotel customers are temporarily
connected by leased local lines awaiting the construction of the optical cable
route. Currently, all Sector BG's hotel customer's PBXs retain their traditional
interface to the PSTN for local, national, long distance and incoming
international calls.
Sector BG supports a remote control and customer service center in its office
and switch room in Sofia. It assists its hotel customers administration in
resolving any dialing and billing problems of its guests. Emergency services to
its customers is provided on a 24 hour basis.
A centralized billing system issues monthly bills to the customers that are
matched to the records of the hotel call logger.
Government Regulation and Operating Agreements
-----------------------------------------------
The telecommunications sector of Bulgaria was initially based on the legal and
regulatory framework of the Soviet Union. Under this system, the Ministry of
Posts and Telecommunications was given the monopoly over all telecommunications
services, including television and broadcasting. Article 16 of the Bulgaria's
Constitution stated that "...posts, telegraph, telephones, radio and
television...are state property only." The Ministry is responsible for planning
and coordinating policies concerning telecommunications services.
Reform in telecommunications in Bulgaria began in 1991. It is part of the
general tendencies in Europe in this field and covers three domains: structure,
jurisdiction and technology. The reform aims at a gradual ousting of state
monopoly in telecommunications by establishing government regulation and a
competitive telecommunications service market.
The Committee of Post and Telecommunications ("CPT") is the regulatory body for
telecommunications, mobile phone, satellite and cable TV operators in Bulgaria.
It is a state organization which has no say over the economic aspects of the
main national operator the Bulgarian Telecommunications Company LTD ("BTC")
which holds the monopoly on basic network services, satellite communications,
all long-distance and international telephone and telex services.
7
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The CPT sets the development strategy for the telecommunication infrastructure,
approves bids, tenders and grants licenses to operating entities. The CPT's
stated goal is to drive forward the liberalization of the telecommunications
market through licensing and privatization. Bulgaria intends to follow the
general recommendations of the European Union's Green Paper on
Telecommunications and the Uruguay Round of GATT negotiations regarding
liberalization of the telecommunications sector. Bulgaria's government has
undertaken a plan to sell through a tender process a controlling interest in the
BTC.
On September 21, 1993, Global Communications Group, Inc. ("Global") executed a
Memorandum of Understanding with the BTC to provide a closed, private, long
distance traffic network for the hotel and resort industry in the Republic of
Bulgaria. Global and the BTC then executed a JAA on January 26, 1994 which
enabled Global to provide end-to-end international carrier switched service to
terminate all switched voice traffic from the hotels in Bulgaria.
On July 8, 1996, the BTC unilaterally and unexpectedly terminated the JAA and
prohibited Global from accessing the state-owned long-distance switching network
and effectively terminated Global's ability to provide its core service
international long-distance access. Although the Company considered the BTC's
actions both illegal and unjustifiable, it entered into negotiations with the
BTC to effect a settlement.
On February 14, 1997, the Company entered into its a ten (10) year Joint
Activity Agreement ("JAA-2") with the BTC to provide an enhanced group of
services to its customers. As part of this new agreement, which replaces the
original five (5) year JAA, a new, wholly-owned, Bulgarian subsidiary company,
Sector-Bulgaria, EOOD (referred to hereinafter as "Sector BG") was created. All
business is being done as Sector BG and existing contracts and agreements are
being modified to reflect the new operating structure. Ultimately, it is
anticipated that all of the assets and liabilities of Global will be assigned to
Sector BG.
As a result of the political changes in Bulgaria that took place in the
beginning of 1997 the JAA-2 was further amended and coordinated with the new
management of the BTC and EBRD to take its final and current form in September
1997. By virtue of this last agreement with the BTC Sector BG acts as an agent
of a group of selected customers in their relations with the BTC in the aspect
of special access circuits and interconnection, international dialing, call
accounting and billing and optical cable construction.
8
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In February 1997, Bulgaria entered into a World Trade Organization Agreement
(the "WTO Agreement") that should have the effect of liberalizing the provision
of switched voice telephone and other telecommunications services in many
foreign countries beginning January 1, 2003. As a result of the WTO Agreement,
the Company expects the BTC, among other things, to reexamine its policies
regarding (i) the services that may be provided by foreign owned international
common carriers, and (ii) the provision of international switched voice services
outside of the traditional settlement rate and proportionate return regimes. The
implementation of the WTO Agreement may also make it easier for foreign carriers
with market power in their home markets to offer Bulgarian and foreign customers
end-to-end services to the disadvantage of Sector BG, which may face substantial
obstacles in obtaining from foreign governments and foreign carriers the
authority and facilities to provide such end-to-end services.
Competition
-----------
Virtually all markets for telecommunications services are extremely competitive,
and the Company expects that competition will intensify in the future. In each
of the markets in which it offers telecommunications services, the Company faces
significant competition from carriers with greater market share and financial
resources. The Company competes in Bulgaria with the government provider, which
has historically monopolized the local telecommunications market. A continuing
trend toward business combinations and alliances in the telecommunications
industry and Bulgaria's move to privatize its telecommunications system may
create significant new competitors to the Company. (The government provider is
close to executing an agreement with a joint venture composed of OTE (the Greek
government telecommunications provider and KPN (the government
telecommunications provider in the Netherlands) which will transfer ownership of
the BTC to that consortium. Such a realignment of the BTC operations could have
a severely negative impact upon the Company.) Many of the Company's existing and
potential competitors have financial, personnel and other resources
significantly greater than those of the Company. Other potential competitors
include foreign telephone companies, wireless telephone companies, electric
utilities, microwave carriers and private networks of large end users. In
addition, the Company competes with equipment vendors and installers and
telecommunications management companies with respect to certain portions of its
business.
For most of the Company's communications services, the factors critical to a
customer's choice of a service provider are cost, ease of use, speed of
installation, quality, reputation and, in some cases, geography, and network
size. Sector BG's objective is to be one of the most responsive service
providers, particularly when providing customized communications services.
Sector BG's array of communications facilities and international relationships,
together with its engineering and operations capability, provide Sector BG with
considerable flexibility in tailoring cost-effective communications services to
meet its customers' requirements. Ownership of this network will allow Sector BG
to implement complex permanent and temporary communications circuits to and from
locations throughout Bulgaria. Sector BG relies on its decentralized management
structure and the local orientation of its operations and personnel to
distinguish itself from larger, less personalized operations. In addition,
Sector BG's understanding of Bulgaria's telecommunications technical and
regulatory issues has often allowed Sector BG to provide prompt solutions to the
diverse communications needs of its customers. No assurance can be given,
however, that the Company's strategies will be successful.
9
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The Company may also be subject to additional competition due to the development
of new technologies and increased availability of domestic and international
transmission capacity. For example, even though fiber-optic networks, such as
that of the Company, are now widely used for long distance transmission, it is
possible that the desirability of such networks could be adversely affected by
changing technology. The telecommunications industry is in a period of rapid
technological evolution, marked by the introduction of new product and service
offerings and increasing satellite and fiber optic transmission capacity for
services similar to those provided by the Company. The Company cannot predict
which of many possible future product and service offerings will be important to
maintain its competitive position or what expenditures will be required to
develop and provide such products and services.
Dependence on major customers
-----------------------------
The Company currently provides services to a limited base of 9 customers and
therefore relies heavily on the business from each. Sector BG's five largest
customers accounted for greater than 80% of total revenues for the year ended
February 29, 2000. No single customer, however, accounted for more than 50% of
all revenues generated. Sector BG is actively working to retain its customer
base and diversify the types of services that it provides in order to reduce the
dependence on any single customer or type of service.
Tariffs
-------
The tariff structure of the BTC is slowly undergoing changes that are trying to
reflect the transition to a market economy while still providing social credit
to subscribers with poor financial status, which constitutes the majority of the
telecommunications users in Bulgaria. Tariffs, both international and domestic
are approved by the government and are defined in the local currency the
Bulgarian Leva. The Leva exchange rate has been pegged to the German Mark (on a
1:1 basis) and as such the previous wide fluctuations in the value of the
currency have been reduced to the stable level afforded by the Mark. This
stability has been established by a currency control board that was mandated by
an agreement between the government of Bulgaria and the International Monetary
Fund.
Employees
---------
At February 29, 2000, Sector BG had approximately 9 full time employees in
Bulgaria. The technical staff consists of three highly qualified system
engineers and a service technician that perform network planning and
engineering, as well as the maintenance functions of Sector BG's Network
facilities and the five hotel PBXs. Sector BG uses independent contractors for
cable construction, call logger installation and for other functions as
necessary. Three employees are responsible for customer billing and accounting.
The remainder of the employees perform administrative and logistical tasks.
10
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Sector Communications AG
------------------------
As of February 28, 1999, Sector has reduced by 100% the total amount of goodwill
carried on its balance sheet with respect to its investment and interest in
HIS/Ideous. Please see Item 6, "Management Discussion and Analysis," for further
information concerning HIS/Ideous. Any reading of the descriptive material
herein with respect to HIS/Ideous must be read in context of such a write-down
of the asset.
NOTE: All references in this filing either to Histech or Ideous refer to the
same entity and products. The trade name of Histech has been changed to Ideous
with no effect on the ownership of the company or products resulting from such
change.
OVERVIEW
HIS Technologies AG (hereinafter interchangeably "Histech" or "Ideous") is a
Swiss corporation founded in 1996. Histech is an independent software vendor
that develops and markets enterprise automation software solutions for managing
distributed computer systems in multi-vendor, multi-platform computing
environments.
Employees
---------
At February 29, 2000, the Company, in addition to the staff employed by its
subsidiaries, had no full-time and two part-time employees. The Company uses
independent contractors and consultants, as necessary.
Principal Office
The Company is a Nevada corporation with its executive offices located at 7601
Lewinsville Road, Suite 250, McLean, Virginia 22102. Its telephone number is
(703) 761-1500.
ITEM 2. Properties
Office Facilities
-----------------
At February 29, 2000, the Company leased the following facilities:
Lease Approximate
Location Primary Use Sq. Footage Expiration
-------- ----------- ----------- ----------
McLean, VA Corporate Office 6,500 March 2003
Englewood, CO Corporate Office 3,664 September 2000
11
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At February 29, 2000, the Company's subsidiaries leased the following
facilities:
Lease Approximate
Location Primary Use Sq. Footage Expiration
-------- ----------- ----------- ----------
Zurich, Switzerland Corporate Office 3,488 June 2000
Sofia, Bulgaria Corporate Office 2,500 January 2001
The Company is committed under non-cancelable operating lease agreements for
office space at the above locations and has subleased the entire Colorado
location and substantial portions of the McLean location on terms similar to its
master leases.
ITEM 3. Legal Proceedings
The following is a summary of material legal proceedings involving the Company,
which the Company believes were incurred in the normal course of business. The
reader is cautioned to review this summary in conjunction with the Company's
prior filings, which may, for any particular action, contain more detailed
information regarding case history and related events. The summary provided
reflects only those cases which are presently pending or which had significant
or material developments during the period addressed by this filing.
Agricola Metals, Inc. v. Sector Communications, Inc.
Superior Court of New Jersey, Mercer County
Case No. MER-L-468-00
Filed February 3, 2000
--------------------------------------------------------------
Plaintiff alleges a consulting contract with Sector and nonpayment of $31,135.60
allegedly owed pursuant to contract. The Company filed an answer and denied each
and every allegation of the Complaint; discovery is proceeding and the case is
currently pending. While the company doubts the merits of claimant's action, the
outcome of the action is uncertain and may materially and adversely affect the
financial condition and viability of the Company if such outcome proves
unfavorable to the Company.
Hasler, Stanga, Von Esch and Kim v. S. Allan Kline, Biomyne Technology Company,
Biomyne Exploration Company, San Jose National Bank, Aurtex, Inc., Sector, Inc.
--------------------------------------------------------------
Superior Court of the State of California, Santa Clara District
Case No. CV 763949
Filed February 7, 1997
The Company was involved in this previously disclosed action and engaged
California counsel to represent it and conduct its defense. During the course of
counsel's representation and aggressive defense, Plaintiffs dismissed their
claims against the Company without prejudice. Thereafter, when the Company moved
for sanctions, costs and fees, the Plaintiffs agreed to dismiss their claims
with prejudice in exchange for a mutual release. On or about April 26, 2000, the
Plaintiffs and the Company entered into a Settlement and Release Agreement that
effected the dismissal with prejudice. No funds were paid by the Company to the
Plaintiffs in obtaining said Settlement and Release Agreement.
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Lodestone Group, Inc. v Sector Communications, Inc and Krissos Resources, Inc.
District Court, Arapahoe County, Colorado
Case No. 97CV1263
Filed June 6, 1997
--------------------------------------------------------------
The Company was involved in this previously disclosed action suffered judgment
for approximately $42,000, plus costs and fees, in September 1998. On March 30,
2000, the parties settled for $15,000. The Company has not yet paid $15,000 to
the Plaintiff, but fully intends to do so when able.
Scherpenhuijzen v. Ideous Technologies AG
--------------------------------------------------------------
A former employee of Ideous filed suit against Ideous for wrongful termination.
Judgment was entered against Ideous in the amount of $110,850. An appeal is
pending. The full amount of the judgment has been accrued in Ideous's financial
statements. The Company has limited contact with Ideous and, for this reason,
has only limited information regarding this matter. While the company doubts the
merits of claimant's action, the outcome of the appeal is uncertain and may
materially and adversely affect the financial condition and viability of the
Company if such outcome proves unfavorable to the Company.
Shetty v. World-Wide Plumbing Supply, Inc., Allan Kline, and Sector
Communications, Inc.
Supreme Court of New York, County of Queens
Case No. 19847-99
Filed September 7, 1999
--------------------------------------------------------------
Plaintiff alleges Allan Kline represented he was the President of Sector and
would sell Plaintiff 35,000 shares of stock for $ 20,000.00. Mr. Kline allegedly
told Plaintiff that World-wide Plumbing Supply, Inc. was the parent company of
Sector. Plaintiff issued a check to World-wide Plumbing and it was cashed.
World-wide is an entity in the New York area and has filed an answer. Sector has
no knowledge of World-wide Plumbing and denies each and every allegation of
wrongdoing. Sector pled that Allan Kline was not the President of Sector and has
no knowledge of any of the facts. Plaintiff is seeking $ 20,000.00. The case is
pending. While the company doubts the merits of claimant's action, the outcome
of the action is uncertain and may materially and adversely affect the financial
condition and viability of the Company if such outcome proves unfavorable to the
Company.
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Svennson v. Sector Communications, Inc.
United States District Court for the Eastern District of Virginia, Alexandria
Division
Civil No. 98-1751-A
Filed December 8, 1998
--------------------------------------------------------------
Plaintiff alleged broker fees were due in connection with a financing
transaction and sought $1,750,000 in monetary damages and 400,000 shares of
stock. The case was dismissed without prejudice by Plaintiff in June 1999. The
time period for the Plaintiff to re-file suit expired.
Symark International, Inc. v. Ideous, Robert Scherpenhujizen et al.
--------------------------------------------------------------
Superior Court of California, County of Los Angeles, Central District
Filed November 8, 1996
The Company was involved in this previously disclosed action. In December, 1999,
each party to the action agreed to withdraw all pending actions against the
other parties; as the Company has limited contact with Ideous, it has only
limited information regarding this matter.
USIS International Capital Corp. v. Sector Communications, Inc and S.Allan Kline
Supreme Court, New York County of New York
Case No. 114967 / 98
Filed August 14, 1998
--------------------------------------------------------------
The Company was involved in this previously disclosed action and engaged Counsel
to vigorously defend it. The suit by USIS was dismissed with prejudice on
September 28, 1999 at no cost to the Company.
ITEM 4. Submission of Matters to vote of Security Holders
No matters were brought to a vote of the Security Holders during the quarter
ended February 29, 2000.
14
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PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters
Price Range of Common Stock
---------------------------
The Company's common stock is presently traded on the NASD
Over The Counter Bulletin Board (OTC BB) under the symbol "SECT". The following
table sets forth the high and low bid price for each quarter of the last two
years.
The quotations represent prices between dealers in securities, do not include
retail markup, markdowns or commissions and may not necessarily represent the
actual transactions.
Quarter Ended High Low
------------- ---- ---
February 29, 2000 0.53 0.06
November 30, 1999 0.19 0.12
August 31, 1999 0.31 0.22
May 31, 1999 0.30 0.16
February 28, 1999 0.28 0.21
November 30, 1998 0.84 0.62
August 31, 1998 1.46 1.40
May 31, 1998 2.00 2.62
Approximate Number of Equity Security Holders
---------------------------------------------
At February 29, 2000 there were approximately 336 active holders of record of
the Company's common stock. The Company believes that many additional holders of
the Company's common stock are unidentified because their shares are held by
brokers in nominee accounts or "street name".
Recent Sales of Unregistered Securities
---------------------------------------
In May, 1999, the Company sold 3,846,150 shares of common stock to two
purchasers for cash proceeds of $ 100,000.00. The shares were sold in a
transaction exempt from registration in reliance on Section 4(2) of the
Securities Act of 1933.
FORWARD STOCK SPLIT
On July 1, 1999, the Company effected a 5 for 1 stock split. All shares and per
share amounts presented in the financial statements give retroactive effect to
this stock split.
15
<PAGE>
ITEM 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Sector includes certain estimates, projections and other forward-looking
statements in its reports, presentations to analysts and others and other
material disseminated to the public. There can be no assurance as to future
performance and actual results may differ materially from those in the
forward-looking statements. Factors that could cause actual results to differ
materially from estimates or projections contained in forward-looking statements
include: (i) the effects of vigorous competition in the markets in which Sector
operates; (ii) the cost of entering new markets necessary to provide products
and services; (iii) the impact of any unusual items resulting from ongoing
evaluations of Sector's business strategies; (iv) requirements imposed on Sector
and its competitors by the Bulgarian Telecommunications Company (BTC); (v)
unexpected results of litigation filed against Sector; and (vi) the possibility
of one or more of the markets in which Sector competes being affected by
variations in political, economic or other factors such as monetary policy,
legal and regulatory changes or other external factors over which Sector has no
control.
As discussed below, the software sales and maintenance revenues of its
subsidiary, HIS Technologies, AG, (HIS) have declined significantly. HIS, in the
opinion of Sector management, does not have sufficient capital available to it
to meaningfully continue its operations in the foreseeable future. Sector will
not make available to HIS any additional capital nor commit to seek on behalf of
HIS such additional capital. We have encouraged the management of HIS to pursue
third-party sources for such capital with the understanding that we will
consider any meaningful offers from others to facilitate the investment by them
of such capital into HIS. Such an investment source, if one were available,
would undoubtedly insist upon a substantial dilution of the ownership position
which Sector maintains in HIS. There can be absolutely no assurance that such a
possible source of capital for HIS will be found and, consequently, we expect
that the continued operation of HIS as a viable entity is in jeopardy.
Any substantial decrease in Sector's revenues will materially and adversely
affect its operating results because most of Sector's manpower and other
expenses are fixed and cannot be adjusted rapidly to compensate for a
substantial decrease in revenues.
RESULTS OF OPERATIONS
The year ended February 29, 2000 Compared to the year ended February 28, 1999
Telecommunication Revenue - Sector earns all of its telecommunications revenue
from Sector BG (i) providing direct-dial services for international long
distance calls to a select group of hotels and resorts in the cities of Sofia
and Plovdiv in Bulgaria; (ii) from the sales, integration, installation, and
maintenance of customer-owned digital phone systems (primarily through its
distributor agreement with Mitel); and (iii) from usage-based percentages of
Sector BG-owned digital phone systems through shared revenue agreements with
some of its customers.
16
<PAGE>
Sector's telecommunications revenue decreased by $75,266 or 11.5% from 652,505
for the year ended February 29, 1999 ("fiscal 1999") to $577,239 for fiscal
2000. The reduction in revenue was the result of a continuing slow-down in
business activity occurring in Bulgaria as well as the loss of a portion of the
customer base previously
maintained.
Software Sales and Maintenance - Sector's software sales and maintenance revenue
decreased by $90,684 or 12.9% from $703,863 for fiscal 1999 to $613,179 for
fiscal 2000 (all figures are net of payments to third party distributors). The
decrease in sales for fiscal 2000 was attributable to the lack of capital
available to HIS to (1) fund an adequate level of sales and marketing expense
and (2) fund the software and development expense necessary to upgrade existing
product lines or to develop new applications.
Histech utilized the services of software distributors for the sales of its
products in geographic regions which it has no sales force. During fiscal 2000,
approximately 75% of its sales were generated by software distributors.
Costs of Sales - The Cost of Sales of Sector decreased by $155,816 or 26.9% from
$578,316 for fiscal 1999 to $422,500 for fiscal 2000. Most of this decrease was
attributable to the decrease in revenues experienced by Sector BG as well as
operational efficiencies put in place.
Software Development Costs - Software development costs consisted primarily of
salaries, related benefits, consultants fees and other costs. Sector's software
development costs decreased by $226,360 or 47.3% from $478,563 for fiscal 1999
to $252,203 for fiscal 2000. The decrease was attributable to the lack of
available capital to HIS to adequately fund its software development needs.
Management believes that a significant level of software development costs will
be required by Histech to remain competitive and expects such costs will
increase in the future if the funding for such increased costs is available to
Sector.
Operating Expenses (exclusive of Software Development Costs)- Operating expenses
consisted primarily of personnel costs, including salaries, benefits and bonuses
and related costs for management, finance and accounting, legal and other
professional services. Total operating expenses of Sector decreased by
$918,570 or 52.3% from $1,754,764 for fiscal 1999 to $836,194 for fiscal 2000.
These reductions in operating expenses are expected to continue inasmuch as
Sector has substantially reduced its corporate overhead expenses. Additionally,
the HIS-related operating expenses have been substantially reduced. To continue
to operate Sector at the currently reduced level of operating expenses may
severely impact the ability of Sector to continue as a viable on-going concern.
17
<PAGE>
Administrative Costs and Other Costs- Management expects that Sector BG's
general and administrative costs, not taking into consideration any expansion of
the current network, to remain at current levels. The development of a cable tv
operation by Sector BG, as discussed elsewhere, will increase these costs beyond
present levels. The Company is unable to estimate the dollar amount or
percentage of expected increase at this time, as expansion plans have not yet
been sufficiently framed to allow the Company to make such assessments.
Sales, general and administrative costs of Histech consist primarily of salaries
and related costs, fees, marketing expenses, depreciation and the amortization
of intangible assets. Management of Histech believes that as new products are
introduced into the market in the future, significant marketing costs will be
incurred to successfully promote these products.
Management expects Sector's general and administrative costs, exclusive of any
addition of new employees, to remain at or below the levels experienced in
fiscal 2000.
Interest Expense - Interest expense for fiscal 2000 decreased by $45,251 as
compared to the expense in fiscal 1999. The decrease in interest expense was
primarily result of the conversion in 1999 of a portion of previously issued
convertible debentures to common stock and the resultant reduction in debt
outstanding.
Management expects that interest expense could increase in the future to the
degree Sector borrows funds in order to finance any continuing operating cash
flow deficits and implements any capital expenditure plans.
EXPANSION OF THE SCOPE OF SERVICES OF SECTOR BG
The current availability of quality TV transmission and programming in Bulgaria
is limited. The market is dominated by the one state-owned national operator
(BTV) and Rupert Murdoch's News Corporation was recently granted a national
license which is expected to be operational this year. The bulk of the other
available programs and services are largely provided by so-called "pirate" or
unlicensed operators who provide tv service and programming via satellite. The
management of Sector BG believes that a significant opportunity exists within
Bulgaria to profitably provide licensed quality tv programming and delivery.
Sector Bulgaria has applied for three new telecommunications licenses in
Bulgaria. These include:
1. A license to become a Cable Network Operator within Bulgaria. This license
will enable Sector BG to provide to itself and others the ability to
broadcast cable programming across its existing owned fiber optic network
within Bulgaria as well as leased lines of others or, to the extent it
occurs, an expanded Sector BG fiber network.
18
<PAGE>
2. A license to provide two channels of TV programming across its network or
the network of others. Sector BG intends to provide a business-oriented
channel and an entertainment channel via this license.
3. A license to become a "Very Small Aperture Terminal" (VSAT) operator within
Bulgaria. Such a license would enable Sector BG to be a provider of TV,
radio, and data transmission via satellite and/or microwave.
All of the above licenses, if and when approved, will have ten-year terms with
certain automatic renewal provisions.
Item 2 (the programming license) is subject to the approval of the Council for
Radio and TV (CRTV) and the State Commission of Telecommunications (SCT), both
Bulgarian government entities. This license was approved by the CRTV on April
10, 2000. Such an approval leads to an almost automatic approval by the SCT of
both Item 1 and Item 2. It is the expectation of the management of the Company
that the final approvals for Items 1 and 2 will occur by June 30, 2000. No
action has been take to-date with respect to Item 3 (which is also under the
purview of the SCT).
Should any or all of the above licenses be granted then the Company will require
a significant infusion of investment capital in order to implement the attendant
business expansion of Sector BG. Although discussion are on-going with respect
to sourcing such capital there can be no assurance that it will become available
or that, if it becomes available, there will not be significant dilution to the
present shareholders of the Company nor that the ensuing business expansion of
Sector BG will be profitable.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 2000, the Company financed Sector's operations primarily through
(i) funds it received from the sale of $100,000 in common stock securities and
(ii) sales revenue and intensified accounts receivable collection efforts from
the Company's subsidiaries. Sector has in the past and is currently experiencing
negative cash flow from operations. The funding of future operations will
require further infusions of capital.
If additional funds are raised by the Company through the issuance of equity
securities, securities convertible into or exercisable for equity securities, or
an equity securities exchange, the percentage ownership of the then current
stockholders of the Company will be reduced. The Company may issue preferred
stock with rights, preferences or privileges senior to those of the Common
Stock. Although discussions are on-going with various potential sources of
additional capital, There can be no assurance that the Company will be
successful in its efforts to obtain adequate capital nor if any such additional
capital is made available to the Company that it will be on terms and conditions
that are not extremely dilutive to the present holders of the Common Stock.
Discontinuance of the listing of the Common Stock on the NASD Small Cap Market
has occurred. Sector is currently listed on the NASD Over the Counter Electronic
Bulletin Board (see the section "NASD Listing" in Item 5 to this Report). This
may adversely impact the Company's ability to obtain future financing. Sector
had no commitments for material capital expenditures as of February 28,1999.
19
<PAGE>
FORWARD-LOOKING STATEMENTS
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements. There are certain important
factors that could cause results to differ materially from those in the
forward-looking statements contained in the above discussion. Among such
important factors are (i) the timely creation of versions of Sector's products
for the Microsoft Windows NT and Unix operating systems, (ii) the impact of
Microsoft Windows NT, Unix and other operating systems on the OpenVMS market
upon which Sector's current products are dependent, (iii) the reliance on
distributors to continue reselling Sector's products, (iv) the ability of Sector
to successfully expand the distribution of its products through new and unproven
channels, including resellers, integrators, distributors and direct sales, (v)
the risks associated with Sector's engineering effort needed to develop products
for Microsoft Windows NT and Unix, (vi) the impact of competitive products and
pricing, (vii) the uncertainty of the labor market and local regulations in
Switzerland, Bulgaria and the United Kingdom, (vii) Sector's ability to hire and
retain research and development personnel with appropriate skills in a highly
competitive labor market, and (viii) such risks and uncertainties as are
detailed from time to time in the Company's public reports, including this
Report.
In addition to the factors described above, factors that may contribute to
future fluctuations in quarterly operating results include, but are not limited
to: (i) the development and introduction of new operating systems that require
additional development efforts; (ii) the introduction or enhancement of products
by Sector or its competitors; (iii) changes in the pricing policies of Sector or
its competitors; (iv) increased competition; (v) technological changes in
computer and telecommunications systems and environments; (vi) the ability of
Sector to timely develop, introduce and market new products and services; (vii)
Sector's quality control of products and services sold; (vii) Sector's market
readiness to deploy systems management products for distributed computing
environments; (ix) Sector's market readiness to deploy new telecommunications
services; (x) market acceptance of new services, products and product
enhancements; (xi) customer order deferrals in anticipation of new products and
product enhancements; (xii) Sector's success in expanding its sales and
marketing programs; (xiii) personnel changes; (xiv) foreign currency exchange
rates; (xv) mix of products sold; and (xvi) general economic conditions.
Sector's future revenues will also be difficult to predict. Accordingly, any
significant shortfall of revenues in relation to management's expectations or
any material delay of customer orders would have an immediate adverse effect on
its business, operating results and financial condition. As a result of all of
the foregoing factors, management believes that period-to-period comparisons of
Sector's results of operations are not and will not necessarily be meaningful
and should not be relied upon as any indication of future performance.
20
<PAGE>
Management of Growth; Dependence on Key Personnel. In the future, Sector will be
required to continue to improve its financial and management controls, reporting
systems and procedures on a timely basis and to expand, train and manage its
employee work force. There can be no assurance that Sector will be able to
effectively manage such growth. Its failure to do so would have a material
adverse effect on its business, operating results and financial condition.
Competition for qualified sales, technical and other qualified personnel is
intense and there can be no assurance that Sector will be able to attract,
assimilate or retain additional highly qualified employees in the future. If
Sector is unable to hire and retain such personnel, particularly those in key
positions, its business, operating results and financial condition would be
materially adversely affected. Sector's future success also depends in
significant part upon the continued service of its key technical, sales and
senior management personnel. The loss of the services of one or more of these
key employees could have a material adverse effect on its business, operating
results and financial condition. Additions of new and departures of existing
personnel, particularly in key positions, can be disruptive and can result in
departures of existing personnel, which could have a material adverse effect on
Sector's business, operating results and financial condition.
Risks Associated With International Operations. International revenue (from
sales outside the United States and Canada) accounted for a significant
percentage of Sector's total revenues for fiscal 1999. Management believes that
Sector's success depends upon continued expansion of its international
operations. Sector currently has sales offices in Bulgaria ,and Switzerland and
and product development groups in Switzerland and the United Kingdom. Sector
has resellers in North America and Europe.Any International expansion may
require Sector to establish additional foreign offices, hire additional
personnel and recruit additional international resellers. This may require
significant management attention and financial resources and could adversely
affect Sector's operating margins. To the extent that Sector is unable to effect
these additions efficiently and in a timely manner, its growth, if any, in
international sales will be limited, and its business, operating results and
financial condition could be materially and adversely affected. There can be no
assurance that Sector will be able to maintain or increase international market
demand for its products. Sector, as noted earlier cannot and will not expand or
contribute further to any maintenance of the operations of its HIS subsidiary in
Switzerland.
International operations subject Sector to a number of risks inherent in
developing products and services outside of the United States, including the
potential loss of developed technology, imposition of governmental controls,
export license requirements, restrictions on the export of critical technology,
political and economic instability, trade restrictions, difficulties in managing
international operations and lower levels of intellectual property protection.
21
<PAGE>
Sector's international business will also involve a number of additional risks,
including lack of acceptance of localized products, cultural differences in the
conduct of business, longer accounts receivable payment cycles, greater
difficulty in accounts receivable collection, seasonality due to the slow-down
in European business activity during Sector's second fiscal quarter, unexpected
changes in regulatory requirements and royalty and withholding taxes that
restrict the repatriation of earnings, tariffs and other trade barriers, and the
burden of complying with a wide variety of foreign laws. Sector's international
sales will be generated primarily through its international distributors and are
expected to be denominated in local currency, creating a risk of foreign
currency translation gains and losses. To the extent profit is generated or
losses are incurred in foreign countries, Sector's effective income tax rate may
be materially and adversely affected. In some markets, localization of Sector's
products is essential to achieve market penetration. Sector may incur
substantial costs and experience delays in localizing its products, and there
can be no assurance that any localized product will ever generate significant
revenue. There can be no assurance that any of the factors described herein will
not have a material adverse effect on Sector's future international sales and
operations and, consequently, its business, operating results and financial
condition.
Rapid Technological Change and Requirement for Frequent Product Transitions. The
market for Sector's products is characterized by rapid technological
developments, evolving industry standards and rapid changes in customer
requirements. The introduction of products embodying new technologies, the
emergence of new industry standards or changes in customer requirements could
render Sector's existing products obsolete and unmarketable. As a result,
Sector's future success will depend upon its ability to continue to enhance
existing products, respond to changing customer requirements and develop and
introduce, in a timely manner, new products that keep pace with technological
developments and emerging industry standards. Customer requirements include, but
are not limited to, product operability and support across distributed and
changing heterogeneous hardware platforms, operating systems, relational
databases and networks. For example, as certain of Sector's customers start to
utilize Windows NT or other emerging operating platforms, it will be necessary
for Sector to enhance and port its products or develop new products to operate
on such platforms in order to meet these customers' requirements. There can be
no assurance that Sector's products or services will achieve market acceptance
or will adequately address the changing needs of the marketplace or that Sector
will be successful in developing and marketing enhancements to its existing
products or new products incorporating new telecommunication technology on a
timely basis. Sector as in the past experienced delays in the development of its
products telecommunications services and there can be no assurance that Sector
will not experience further delays in connection with its current product
development service offering or future service development activities. If Sector
is unable to develop and introduce new products, or enhancements to existing
products, in a timely manner in response to changing market conditions or
customer requirements, Sector's business, operating results and financial
condition will be materially and adversely affected. Because Sector has limited
resources, Sector must restrict its product business development efforts and its
porting efforts to a relatively small number of products and operating systems
services. There can be no assurance that these efforts will be successful or,
even if successful, that any resulting products or operating systems will
achieve market acceptance.
22
<PAGE>
Sector may also be subject to additional competition due to the development of
new technologies and increased availability of domestic and international
transmission capacity. For example, even though fiber-optic networks, such as
that of Sector, are now widely used for voice and data transmission, it is
possible that the desirability of such networks could be adversely affected by
changing technology. The telecommunications industry is in a period of rapid
technological evolution, marked by the introduction of new product and service
offerings and increasing satellite and fiber optic transmission capacity for
services similar to those provided by Sector. Sector cannot predict which of
many possible future product and service offerings will be important to maintain
its competitive position or what expenditures will be required to develop and
provide such products and services.
Dependence on Proprietary Technology; Risks of Infringement. Sector's success
depends upon its proprietary technology. Sector will rely on a combination of
copyright, trademark and trade secret laws, confidentiality procedures and
licensing arrangements to establish and protect its proprietary rights. Sector
does not have any patents material to its business and has no patent
applications filed. As part of its confidentiality procedures, Sector will
generally enter into non-disclosure agreements with its employees, distributors
and corporate partners, and license agreements with respect to its software,
documentation and other proprietary information. Despite these precautions, it
may be possible for a third party to copy or otherwise obtain and use Sector's
products or technology without authorization, or to develop similar technology
independently. Policing unauthorized use of Sector's products is difficult and
although Sector is unable to determine the extent to which piracy of its
software products exists, software piracy can be expected to be a persistent
problem. Sector will make source code available for certain of its products and
the provision of such source code may increase the likelihood of
misappropriation or other misuses of Sector's intellectual property. In selling
its products, Sector will also rely in part on "shrink wrap" licenses that are
not signed by licensees and, therefore, may be unenforceable under the laws of
certain jurisdictions. In addition, effective protection of intellectual
property rights is unavailable or limited in certain foreign countries. There
can be no assurance that Sector's protection of its proprietary rights including
any patent that may be issued, will be adequate or that Sector's competitors
will not independently develop similar technology, duplicate Sector's products
or design around any patents issued to Sector or other intellectual property
rights.
Sector is not aware that any of its products infringes the proprietary rights of
third parties. There can be no assurance, however, that third parties will not
claim such infringement by Sector with respect to current or future products.
Sector expects that software product developers will increasingly be subject to
such claims as the number of products and competitors in Sector's industry
segment grows and the functionality of products in the industry segment
overlaps. Any such claims, with or without merit, could result in costly
litigation that could absorb significant management time, which could have a
material adverse effect on Sector's business, operating results and financial
condition. Such claims might require Sector to enter into royalty or license
agreements. Such royalty or license agreements, if required, may not be
available on terms acceptable to Sector or at all. If such agreements are
entered into they could have a material adverse effect upon Sector's business,
operating results and financial condition.
23
<PAGE>
To date the Company has not experienced any problems resulting from Year 2000
computer issues; any such issues were resolved prior to January 1, 2000.
Sector's Officers and Directors have spent the last two years working on legal
cases brought against the Company by actions of previous board members and
Officers. Almost all litigation has been terminated (See Item 3, Legal
Proceedings).
From late 1998 until the present, the Officers and the Board have been operating
the Company with extremely limited funds. In January, 1999, the Board of
Directors and Officers determined it was in the best interest if the Company to
preserve funds for litigation expenditures and other necessary expenses to keep
the Company as a functioning entity. The Board decided it was in the best
interest of the Company to pay the Officers and Directors with options for
Common stock, with the hope that the company could resolve all of the litigation
against it, and move into the future. Other than the officers, there were no
employees or other office staff working on the company's matters.
ITEM 7. Financial Statements
Index to Financial Statements
Independent Accountant's Report..........................................F-1
Consolidated Financial Statements -
February 29, 2000 and February 28, 1999
Consolidated Balance Sheets.......................................F-2
Consolidated Statements of Operations.............................F-3
Consolidated Statements of Stockholder's Equity...................F-4
Consolidated Statements of Comprehensive Loss.....................F-5
Consolidated Statements of Cash Flows.............................F-6
Notes to Consolidated Financial Statements........................F-8
24
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS
SECTOR COMMUNICATIONS, INC.:
We have audited the accompanying consolidated balance sheets of SECTOR
COMMUNICATIONS, INC. of February 29, 2000 and February 28, 1999, and the related
consolidated statements of operations, comprehensive income, stockholders'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of SECTOR
COMMUNICATIONS, INC. as of February 29, 2000 and February 28, 1999, and the
consolidated results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 14 to
the financial statements, the Company has suffered recurring losses from
operations and its limited capital resources raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 14. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
New York, New York
June 7, 2000
F-1
<PAGE>
SECTOR COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEET
February 29, February 28,
2000 1999
------------- -------------
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 170,607 $ 181,877
Accounts Receivable, net of provision
for doubtful accounts of $18,148
and $17,000 391,681 494,563
Prepaid Expenses 30,597 22,343
------------- -------------
Total Current Assets 592,885 698,783
------------- -------------
PROPERTY AND EQUIPMENT 2,019,960 2,145,722
Accumulated Depreciation (1,803,610) ( 1,696,918)
------------- -------------
Net Book Value 216,350 448,804
------------- -------------
OTHER ASSETS
Other Assets - 22,581
Deposits 28,289 28,041
------------- -------------
Total Other Assets 28,289 50,622
------------- -------------
TOTAL ASSETS $ 837,524 $ 1,198,209
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses 1,818,732 1,797,216
Debentures Payable, Net of Discount
of $-0- and $56,309 263,952 207,643
Deferred Revenue 203,878 335,105
Due to Related Parties 180,355 182,891
------------- -------------
Total Current Liabilities 2,466,917 2,522,855
Rent Deposit 12,248 12,248
------------- -------------
TOTAL LIABILITIES 2,479,165 2,535,103
------------- -------------
Commitments and Contingencies
STOCKHOLDERS' EQUITY
Preferred Stock, $.001 par value; 5,000,000
shares authorized, no shares issued and
outstanding - -
Preferred Stock, Series A $.001 par value,
and 250 shares issued and outstanding - -
Common Stock, $.001 par value; 40,000,000
shares authorized 17,193,805 and 10,922,655
shares issued and outstanding 17,194 10,923
Additional Paid-in Capital 14,376,351 14,185,622
Accumulated Deficit (15,748,015) (15,364,474)
Cumulative Foreign Currency Translation
Adjustment ( 287,171) ( 168,965)
------------- -------------
Total Stockholders' Equity ( 1,641,641) ( 1,336,894)
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 837,524 $ 1,198,209
============= ============
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
F-2
<PAGE>
SECTOR COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED
February 29, February 28,
2000 1999
------------- -------------
REVENUE
Telecommunication Revenue $ 577,239 $ 652,505
Software Sales & Maintenance 613,179 703,863
------------- -------------
1,190,418 1,356,368
COST OF SALES 422,500 578,316
------------- -------------
GROSS PROFIT 767,918 778,052
------------- -------------
OPERATING EXPENSES
Software Development Costs 252,203 478,563
Sales, General & Administrative 836,194 1,754,764
------------- -------------
Total Operating Expenses 1,088,397 2,233,327
------------- -------------
Loss From Operations (320,479) (1,455,275)
------------- -------------
OTHER INCOME (EXPENSE)
Interest Expense ( 75,231) ( 120,482)
Other Income (Expense) 12,169 ( 57,763)
Impairment of Goodwill - (4,583,583)
Foreign Exchange Gain - 97,242
------------- -------------
Total Other Income (Expense) ( 63,062) (4,664,586)
------------- -------------
Loss Before Provision for Income Taxes (383,541) (6,119,861)
Provision for Income Taxes - -
------------- -------------
Net Loss $ (383,541) $ (6,119,861)
============= =============
Loss Per Share:
Basic and Undiluted $ (0.02) $ (0.71)
============= =============
Weighted Average Common Shares Outstanding 16,371,391 8,589,193
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
SECTOR COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Additional Currency
Preferred Stock Common Stock Paid-in Accumulated Translation
Shares Amount Shares Amount Capital Deficit Adjustments Total
------ ------ ------ ------ ------- ------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, March 1, 1998 250 - 4,589,810 4,590 13,726,037 (9,244,613) ( 169,910) 4,316,104
Adjustment of Shares - - 11,765 12 (12) - - -
Shares issued to retire debt - - 126,530 126 38,888 - - 39,014
Shares issued in connection with
Preferred Stock Conversion - - 375,000 375 (375) - - -
Shares issued in conversion of
Preferred Stock (250) - 666,885 667 (667) - - -
Shares issued in connection with
Sale of Debentures - - 300,000 300 254,700 - - 255,000
Conversion of Debentures - - 4,386,000 4,386 132,518 - - 136,904
Satisfaction of Debt - - 466,665 467 34,533 - - 35,000
Foreign Currency
Translation Adjustments - - - - - - 945 945
Net Loss - - - - - ( 6,119,861) - (6,119,861)
------- -------- ---------- -------- ----------- ------------ ----------- -----------
Balance, February 28, 1999 - - 10,922,655 10,923 14,185,622 (15,364,474) ( 168,965) (1,336,894)
Common stock issued in settlement
of accounts payable - - 2,425,000 2,425 94,575 - - 97,000
Sale of common stock - - 3,846,150 3,846 96,154 - - 100,000
Foreign currency
translation adjustments - - - - - - ( 118,206) ( 118,206)
Net loss - - - - - (383,541) - ( 383,541)
-------- -------- ---------- -------- ----------- ------------ ----------- -----------
Balance February 29, 2000 - $ - 17,193,805 $ 17,194 $14,376,351 $(15,748,015) $( 281,171) $(1,641,641)
======== ======== ========== ======== =========== ============ =========== ===========
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
F-4
<PAGE>
SECTOR COMMUNICATIONS , INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
FOR THE YEARS ENDED
February 29, February 28,
2000 1999
------------- -------------
COMPREHENSIVE LOSS
Net loss $ ( 383,541) $ (6,119,861)
Foreign currency translation adjustment ( 118,206) 945
------------- -------------
COMPREHENSIVE LOSS $ ( 501,747) $ (6,118,916)
============= =============
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
F-5
<PAGE>
SECTOR COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED
February 29, February 28,
2000 1999
------------- -------------
FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ ( 383,541) $ (6,119,861)
Adjustments to Reconcile Net Loss to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 253,052 841,295
Reserve for Bad Debt 1,148 16,403
Amortization of Loan Costs and Discount 78,889 146,967
Impairments - 4,583,583
Change in Assets and Liabilities
(Increase) Decrease in Assets
Accounts Receivable 101,734 27,544
Prepaid Expenses and Deposits ( 8,502) 18,451
(Decrease) Increase in Liabilities
Accounts Payable 118,516 187,505
Related Party Payable ( 2,536) ( 58,881)
Deferred Revenue ( 131,227) 36,686
------------- -------------
Net Cash Used By Operating Activities 27,533 ( 320,308)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Fixed Assets ( 42,374) ( 146,275)
Repayment of Note - 87,500
------------- -------------
Net Cash (Used) Provided by Investing Activities ( 42,374) ( 58,775)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the Sale of Convertible Debentures - 430,000
Proceeds from the Sale of Common Stock 100,000 -
------------- -------------
Net Cash Provided by Financing Activities 100,000 430,000
------------- -------------
Effect of Exchange Rate Changes on Cash ( 96,429) 2,049
------------- -------------
Net (Decrease) Increase in Cash ( 11,270) 52,966
Cash - March 1 181,877 128,911
------------- -------------
Cash - February 29 and 28, respectively $ 170,607 $ 181,877
============= =============
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
F-6
<PAGE>
SECTOR COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED
SUPPLEMENTAL CASH FLOWS INFORMATION: February 29, February 28,
2000 1999
------------- -------------
Cash Paid For:
Interest $ - $ -
============= =============
Taxes $ - $ -
============= =============
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCIAL ACTIVITIES:
During the year ended February 29, 2000:
Common stock totaling 2,425,000 shares were issued in settlement of accounts
payable aggregating $97,000.
During the year ended February 28, 1999:
o $250,000 of preferred stock was converted into 666,885 shares of
common stock.
o 375,000 shares of common stock were issued in connection with the
preferred stock conversion.
o 593,195 shares of common stock were issued to retire an aggregate of
$74,014 of debt.
o 300,000 shares of common stock, valued at $255,000, were issued in
connection with the sale of convertible debentures.
o 4,386,000 shares of common stock were issued in the conversion of an
aggregate of $143,066 of debentures.
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
F-7
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
NOTE 1 - NATURE OF OPERATIONS
Sector Communications, Inc., incorporated on March 19, 1990 in the
state of Nevada, and its subsidiaries are currently engaged primarily
in the telecommunications and computer software development and sales
industries. The operating activities of the Company are based in the
countries of Bulgaria and Switzerland.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
---------------------
The consolidated balance sheets as of February 29, 2000 and February
28, 1999 and the consolidated statements of operations, stockholders'
equity and cash flows for the years then ended are those of Sector
and its subsidiaries (collectively the "Company"). All significant
intercompany accounts and transactions have been eliminated.
The Company's subsidiaries are as follows:
Global Communications Group, Inc. ("Global")
Sector Bulgaria, PLC ("Sector Bulgaria"), formerly
Sector Bulgaria, Ltd.
Ideous Technologies, AG ("Ideous"), formerly HIS
Technologies, AG
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid investments purchased with
original maturities of three months or less to be cash equivalents.
Concentration of Credit Risk
----------------------------
The Company places its cash in what it believes to be credit-worthy
financial institutions. However, cash balances exceeded FDIC insured
levels at various times during the year.
Deferred Revenue
----------------
The Company bills in advance for software maintenance contracts.
Revenue is recognized as earned over the life of the contracts.
Unearned revenue is shown in the financial statements as deferred
revenue.
Property and Equipment
----------------------
Property and equipment are stated at cost. Expenditures for
maintenance, repairs and renewals are charged to expense, whereas
major additions are capitalized. The cost and accumulated
depreciation of assets retired, sold or otherwise disposed of are
eliminated from the accounts and resulting gains or losses, if any,
are reflected through the statement of income.
Depreciation is computed using the straight-line method over the
estimated useful lives of 3 to 25 years.
F-8
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting standards requires management to make estimates
and assumptions that affect the amounts of assets, liabilities and
contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those
estimates.
Foreign Currency Translation
----------------------------
In accordance with the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 52, "Foreign Currency Translations"
the assets and liabilities of the Company's subsidiaries located
outside the United States are generally translated at the rates of
exchange in effect at the balance sheet date. Gains and losses
resulting from foreign currency transactions are recognized currently
in income and those resulting from translation of financial
statements, with the exception of entities operating in highly
inflationary economies, as Global does in Bulgaria, are accumulated
in a separate component of stockholders' equity. In highly
inflationary economies, SFAS No. 52 requires the use of historical
exchange rates to translate non-monetary items and current exchange
rates to translate monetary items. The effect of exchange rate
changes in highly inflationary economies is reflected in net loss.
Goodwill
--------
Goodwill represents the cost in excess of fair market value of net
assets acquired and also the costs related to the acquisition of
intellectual property and distribution rights. Costs in excess of
fair market value are being amortized using the straight-line method
over twenty years. Costs related to the intellectual property and
distribution rights are being amortized using the straight-line
method over five years.
Fair Value of Financial Instruments
-----------------------------------
The carrying value of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses, short-term borrowings and
advances from related parties approximate fair value due to the
relatively short maturity of these instruments.
F-9
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Share
------------------
The computation of basic earnings per share ("EPS") is computed by
dividing income available to common stockholders by the weighted
average number of outstanding common shares during the period.
Diluted EPS gives effect to all dilutive potential common shares
outstanding during the period. The computation of diluted EPS does
not assume conversion, exercise or contingent exercise of securities
that would have an anti-dilutive effect.
On July 1, 1999, the Company effected a 5 for 1 stock split. All
share and per share amounts presented in the financial statements
give retroactive effect to this stock split.
Income Taxes
------------
Income taxes are provided for based on the liability method of
accounting pursuant to SFAS No. 109, "Accounting for Income Taxes".
The liability method requires the recognition of deferred tax assets
and liabilities for the expected future tax consequences of temporary
differences between the reported amount of assets and liabilities and
their tax bases.
Stock-Based Compensation
------------------------
The Company has adopted the intrinsic value method of accounting for
stock-based compensation in accordance with Accounting Principles
Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees" and related interpretations.
Long-Lived Assets
-----------------
Long-lived assets and certain identifiable intangibles to be held and
used are reviewed for impairment whenever events or changes in
circumstances indicate that the related carrying amount may not be
recoverable. When required, impairment losses on assets to be held
and used are recognized based on the fair value of the assets and
long-lived assets to be disposed of are reported at the lower
carrying among or fair value less cost to sell.
F-10
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Impact of the Year 2000 Issue
-----------------------------
During the period ended December 31, 1999, the Company conducted an
assessment of issues related to the year 2000 and determined that no
issues existed which would cause its computer systems not to properly
utilize dates beyond December 31, 1999.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at February 28:
February 29, February 28,
1999 1998
----------- -----------
Fibre network $ 157,837 $ 157,837
Equipment 1,724,832 1,850,594
Furniture and fixtures 47,223 47,223
Vehicles and other 90,068 90,068
----------- -----------
2,019,960 2,145,722
Less: Accumulated
Depreciation (1,803,610) (1,696,918)
----------- -----------
$ 216,350 $ 448,804
=========== ===========
Depreciation expense for the years ended in 2000 and 1999 was
$253,052 and $373,251, respectively.
NOTE 4 - RELATED PARTY RECEIVABLES AND TRANSACTIONS
During the three month period ended November 30, 1996, the Company
accrued $80,000 for consulting fees incurred for services provided by
MCG Management Consulting Group, S.A. ("MCG"). This agreement was
canceled on November 26, 1996. One of the principles of MCG was also
a director of Sector AG and the Chairman of the Board of Directors of
Histech. This liability remains unpaid as of February 29, 2000 and
February 28, 1999
The Company has also been advanced funds from stockholders,
directors, officers, employees and other related parties. These
advances amount to $100,355 and $102,891 at February 29, 2000 and
February 28, 1999, respectively.
F-11
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
NOTE 5 - INTANGIBLE ASSETS
Intangible assets consisted of goodwill and intellectual property and
distribution rights.
Goodwill has been amortized on a straight-line basis over twenty
years. Intellectual property and distribution rights have been
amortized over an estimated useful life of five years.
At February 28, 1999, both the goodwill and intellectual property and
distribution rights have been determined to be fully impaired.
NOTE 6 - CONVERTIBLE DEBENTURES
On April 15, 1998, the Company sold $500,000 in principal amount of
its 6% Convertible Promissory Notes due July 30, 1999 (the "Notes")
pursuant to Regulation S under the Securities Act for net proceeds of
$430,000. In addition, the two purchasers, Amex Corp. Limited and
Danvers Investment Corp., each a British Virgin Island corporation,
with an address in Zurich, Switzerland, each received 150,000 shares
of Common Stock. These shares have been valued at $255,000 and are
recorded as discount on debt in the financial statements. The
discount is being amortized over the life of the notes. Upon
conversion, any unamortized discount attributable to the conversion
amount is charged to additional paid in capital.
Effective May 26, 1998, each holder has the full right to convert its
Note in the principal amount of $250,000, plus accrued interest (at
the rate of 6% per annum), in whole or in part, into shares of Common
Stock at a conversion price equal to the lesser of (1) $2.98 (which
was 80% of the closing bid prices of the Common Stock on April 15,
1998) or (2) 80% of the average closing bid prices of the Common
Stock for the five trading days immediately preceding the conversion
date.
During the year ended February 28, 1999, the holders of the notes
elected to convert an aggregate of $236,048 principal amount of notes
into 4,386,000 shares of common stock. Unamortized discount amounting
to $99,144 has been charged to additional paid in capital upon
conversion.
At February 29, 2000, $263,952 principal amount of the debentures,
which were due July 30, 1999, remained outstanding and are in
default. On July 31, 1999, the interest rate on the outstanding
principal balance increased to 8% per year.
F-12
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
NOTE 7- STOCKHOLDERS' EQUITY
Fiscal Year 1998 Reverse Stock Split
------------------------------------
On July 22, 1997, the Board of the Company authorized an amendment to
the Company's Amended and Restated Articles of Incorporation
approving a reverse stock split of the outstanding shares of the
Common Stock on the basis of one new share of the Common Stock for
each 40 shares of outstanding Common Stock. The Amendment was
approved at the Annual Meeting of Stockholders held on October 21,
1997. This action did not change the par value of the Common Stock of
$.001 per share or the number of authorized shares of the Common
Stock from 50,000,000.
On November 18, 1997, the Board authorized a reverse stock split of
the Common Stock of one share for every 1.25 outstanding shares. The
par value of the Common Stock did not change, but the number of
authorized shares was reduced from 50,000,000 to 40,000,000. The two
reverse stock splits, which had the combined effect of a 1 for 50
reverse stock split, as well as the reduction of the authorized
shares, became effective with the filing of an amendment in Nevada on
December 2, 1997.
Recent Issuances of Common Stock
--------------------------------
On January 5, 1998, FT Trading, based in London, England, purchased
250 shares of the Company's Series A 8% Convertible Preferred Stock,
$.001 par value (the "Series A Preferred"), for $250,000 in a private
placement pursuant to Regulation S under the Securities Act of 1933,
as amended (the "Securities Act"). Concerned that the holder of the
shares of the Series A Preferred may have been selling shares of the
Common Stock, thereby lowering the market price of the Common Stock,
on March 18, 1998, the Company gave the holder notice of its intention
to redeem on April 2, 1998 all 250 shares of the Series A Preferred
for $312,500, which action terminated the holder's right to convert.
In lieu of the redemption, Firstimpex, based in Geneva, Switzerland,
purchased the 250 shares of the Series A Preferred from FT Trading for
the redemption price on the condition that the Company restore the
conversion right and issue to Firstimpex 375,000 shares of Common
Stock, which issuance was effected on April 5, 1998 simultaneously
with the restoration of the conversion right. On the same day,
Firstimpex converted 165 shares of the Series A Preferred into 366,665
shares of the Common Stock based on a conversion price of $0.45 per
share. On May 13, 1998, Firstimpex converted the remaining 85 shares
of the Series A Preferred into 300,220 shares of Common Stock based on
the alternative conversion price of $0.283125 per share, which
represented the average of the closing bid prices during the five
trading days preceding the conversion date.
F-13
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
NOTE 7- STOCKHOLDERS' EQUITY (continued)
Recent Issuances of Common Stock (continued)
--------------------------------
In connection with the sale of its 6% convertible debentures, the
Company issued 150,000 shares of Common Stock to each of two
purchasers.
The Company issued 126,530 shares of Common Stock to retire $39,014
of debt owed to a related party.
On January 25, 1999, the Company and five Director/Officers of the
Company agreed that the Company would issue 2,425,000 shares to these
individuals as payment for services rendered to the Company. The
shares have been valued at $97,000 and were issued during the year
ended February 29, 2000. This liability has been reflected in the
financial statements at February 28, 1999.
In May 1999, the Company sold 3,846,150 shares of Common Stock to two
purchasers for cash proceeds of $100,000.
On July 1, 1999, the Company effected a 5 for 1 stock split. All
share and per share amounts presented in the financial statements
give retroactive effect to this stock split.
NOTE 8- WARRANTS
At February 29, 2000, the Company has outstanding common stock
purchase warrants as follows:
Number Exercise Date of
of Shares Price Exercisable Expiration
--------- ----- ----------- ----------
10,000 $ 22.50 2/28/97 6/30/00
10,000 30.00 7/20/97 6/30/00
10,000 40.00 7/20/98 6/30/00
During the year ended February 29, 2000, 150,000 warrants expired
unexercised.
NOTE 9 - STOCK OPTION PLANS
Under the 1991 and 1994 Stock Plans, the Company can grant incentive
stock options, non-statutory stock options, and purchase rights to
officers, key employees, consultants and directors of the Company at
a price not less than the fair market value at the date of the grant.
F-14
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
NOTE 9 - STOCK OPTION PLANS (continued)
In July 1995, the Board of Directors amended the 1994 Stock Plan
increasing the number of shares authorized for issuance under such
plan by 3,000,000 to 4,000,000 shares and increased the number of
shares for which options can be granted to any one participant from
150,000 to 450,000 per year. The adoption of both these amendments to
the 1994 Stock Plan was approved by a majority of the shareholders at
the Annual Meeting held on August 7, 1995.
On June 17, 1996, the Company granted to an employee an incentive
stock option for the purchase of 15,000 shares of the Company's
common stock at $1.0625 per share under the Company's 1994 Stock
Plan. Such option vested 5,000 shares on the date of the grant, with
the remaining shares vesting 5,000 shares on June 17, 1997 and 5,000
shares on June 17, 1998.
On July 14, 1996, the Company granted to an employee an incentive
stock option for the purchase of 18,000 shares of the Company's
common stock at $1.625 per share under the Company's 1994 Stock Plan.
Such option vested 6,000 shares on the date of the grant, with the
remaining shares vesting 6,000 shares on July 19, 1997 and 6,000
shares on July 19, 1998. The employee left the Company's employ prior
to February 28, 1997 and the unvested options were cancelled in
February 1997.
On February 3, 1997, the Company granted to an employee an incentive
stock option for the purchase of 70,000 shares of the Company's
common stock at prices ranging from $.375 to $.90 per share under the
Company's 1994 Stock Plan. Such options vested 30,000 shares on the
date of the grant, with the remaining shares vesting 20,000 shares on
February 3, 1998 and 20,000 shares on February 3, 1999.
On February 21, 1997, the Company granted to an employee an incentive
stock option for the purchase of 30,000 shares of the Company's
common stock at prices ranging from $.375 to $.90 per share under the
Company's 1994 Stock Plan. Such options vested 10,000 shares on the
date of the grant, with the remaining shares vesting 10,000 shares on
February 21, 1998 and 10,000 shares on February 21, 1999.
F-15
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
NOTE 9 - STOCK OPTION PLANS (Continued)
On March 5, 1998, the Company granted to a Director a stock option
for the purchase of 30,000 shares of the Company's common stock at
prices ranging from $.375 to $.90 per share under the Company's 1994
Stock Plan. Such options vested 10,000 shares on the date of the
grant, with the remaining shares vesting 10,000 shares on March 5,
1998 and 10,000 shares on March 5, 1999. The director resigned prior
to February 28, 1998 and the unvested options totaling 20,000 shares
have been cancelled.
On January 25, 1999, the Company granted to five Directors options to
purchase an aggregate of 3,180,000 shares of common stock, at an
exercise price of $0.0625 per share. The options vested immediately
and expire on January 25, 2004. The options were issued in connection
with services provided to the Company through the date of issuance.
During the year ended February 29, 2000, the Company granted to five
Directors and officers options to purchase an aggregate of 2,001,458
shares of common stock, at exercise prices of $0.0312 - $0.0438 per
share. The options were vested at February 29, 2000, and expire in
five years.
A summary of stock option transactions are as follows:
Years Ended
February 29, February 28,
2000 1999
------------ ------------
Outstanding, beginning 3,311,000 131,000
Granted Under the 1999 Non-cash
compensation plan at
an exercise price of $0.0625 - 3,180,000
Granted Under the 1999 non-cash
compensation Plan at exercise prices
of $0.0312 to $0.0438 per share 2,001,458 -
------------ ------------
Outstanding, ending 5,312,458 3,311,000
=========== ===========
Exercisable, ending 5,312,458 3,311,000
=========== ===========
F-16
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
NOTE 9 - STOCK OPTION PLANS (Continued)
The Company accounts for its stock option transactions under the
provisions of APB No. 25. The following pro forma information is
based on estimating the fair value of grants based upon the
provisions of SFAS No. 123. The fair value of each option granted
during the periods indicated has been estimated as of the date of
grant using the Black-Scholes option pricing model with the following
assumptions:
Years Ended
February 29, February 28,
2000 1999
------------ ------------
Risk free interest rate 5.25% 5.50%
Life of the options 5 years 5 years
Expected dividend yield 0% 0%
Expected volatility 261% 262%
Weighted fair value of options granted $0.04 $0.06
Accordingly, the Company's pro forma net loss and net loss per share
assuming compensation cost was determined under SFAS No. 123 would
have been the following:
Years Ended
February 29, February 28,
2000 1999
------------ ------------
Net loss $(424,713) $(6,459,187)
Net loss per basic share ( 0.03) ( 0.75)
Weighted average option price per share
Granted $ 0.04 $ 0.06
Exercised - -
Cancelled - -
Outstanding at end of period 0.22 0.32
Exercisable at end of period 0.22 0.32
Weighted average remaining life
of options outstanding 49 months 60 months
F-17
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
NOTE 10 - JOINT ACTIVITY AGREEMENT
The Company signed a new Joint Activity Agreement with the Bulgarian
Telecommunications Company dated February 14, 1997. The new 10-year
agreement replaces a 5-year contract (between the BTC and the
Company's wholly owned subsidiary Global Communications Group, Inc.)
that had been unilaterally terminated by the BTC on July 8, 1996.
Along with extending the term of the Company's engagement, the new
agreement, which went into effect February 21st, also expands greatly
the type of services that the Company can provide to its customers.
The Company has installed a private, high-speed fiber optic network
in Bulgaria's capital city of Sofia and now provides international
long-distance services to customers in Sofia, Plovdiv, and other
areas. Phase I of the network is already providing switched voice
traffic to a select group of luxury hotels and resorts. Phase II will
add additional fiber-optic cable to the network and will expand the
Company's service area to the Black Sea coast.
The Company will continue to handle the daily operations for the new
joint venture from their offices in Bulgaria's capital city of Sofia.
NOTE 11 - INCOME TAXES
The components of the provision for income taxes at February 29, 2000
and February 28, 1999 is as follows:
2000 1999
---------- ---------
Current tax expense
U.S. federal $ $ -
State and local -
---------- ---------
Total current -
---------- ---------
Deferred tax expense
U.S. federal -
State and local -
--------- ---------
Total deferred -
--------- ---------
Total Tax Provision from Continuing
Operations$ $ $ -
--------- ---------
The reconciliation of the effective income tax rate to the Federal
statutory rate is as follows:
Federal income tax rate (34.0)% (34.0)%
Deferred tax charge (credit) - -
Effect of valuation allowance 34.0% 34.0%
State income tax, net of federal benefit - -
-------- -------
Effective income tax rate 0.0% 0.0%
======== =========
F-18
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
NOTE 11 - INCOME TAXES (Continued)
At February 29, 2000, the Company had net carry-forward losses of
approximately $21,300,000. A valuation allowance equal to the tax
benefit for deferred taxes has been established due to the
uncertainty of realizing the benefit of the tax carry-forward.
Deferred tax assets and liabilities reflect the net tax effect of
temporary differences between the carrying amount of assets and
liabilities for financial reporting purposes and amounts used for
income tax purposes. Significant components of the Company's deferred
tax assets and liabilities at February 29, 2000 and February 28, 1999
are as follows:
2000 1999
----------- ----------
Deferred tax assets
Loss carry-forwards $ 7,242,000 $ 7,140,000
Less: Valuation allowance (7,242,000) (7,140,000)
----------- -----------
Net deferred tax assets $ - $ -
=========== =============
Net operating loss carry-forwards expire starting in 2005 through
2019.
NOTE 12- COMMITMENTS AND CONTINGENCIES
1) Operating Leases
The Company has entered into a non-cancelable operating lease
agreement for office space. The agreement contains renewal options
and/or defined rent escalation provisions. The minimum lease payments
under these lease agreements are as follows:
Minimum Minimum
Lease Sublease
Payments Payments
-------- --------
February 28, 2001 $157,728 $ 64,137
2002 145,465 67,404
2003 149,829 69,426
2004 25,216 11,684
---------- ----------
$478,238 $ 212,651
========== =========
The Company has entered into cancelable and non-cancelable sublease
agreements on terms similar to its original lease for office space at
its McLean, Virginia location. Rent expense included in the statement
of operations for the years ended February 29, 2000 and February 28,
1999 was $65,834 and $62,306, respectively.
F-19
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
NOTE 12- COMMITMENTS AND CONTINGENCIES (Continued)
2) On November 8, 1996, Symark International, Inc. ("Symark") filed a
complaint against Ideous and its managing director, Robert
Scherpenhuijzen, in the Superior Court of the State of California for
the County of Los Angeles. On December 3, 1996, the action was removed
to the United States District for the Central District of California.
On March 21, 1997, the District Court granted Ideous' motion to
dismiss the action for improper venue on the ground that the forum
selection clause in the contract between Ideous and Symark specified
the courts of the Canton of Zurich, Switzerland for the resolution of
disputes between Ideous and Symark. On April 18, 1997, Symark served
notice of its appeal to the Ninth Circuit of Appeals of the dismissal
of its lawsuit. The appeal is now pending before the Ninth Circuit.
The focus of this case thus far has been on the procedural issue
whether the case should be dismissed for improper venue because of the
forum selection clause.
The lawsuit arose from disputes between Ideous and Symark concerning
their respective rights and obligations under the License and Reseller
Agreement dated August 1, 1995 between them (the "Agreement"). Symark
contended that Ideous had attempted to engage Symark in "unfair and
unlawful acts and practices and unfair competition" with Ideous and
another distributor, Raxco, and also had made disparaging remarks to
Symark's customers. Ideous' position is that Symark's allegations are
baseless, and that Symark has breached the Agreement, primarily by
failing to pay license fees and by representing Ideous' products as
Symark's own. Ultimately, Ideous terminated the Agreement.
Symark sought to recover unspecified damages and believes the damages
are in excess of $50,000. The Company strongly believed that there is
no merit to the allegations in the Symark complaint and intended to
vigorously defend itself in this action.
In December 1999, each party to the actions agreed to withdraw all
pending actions against the other parties.
F-20
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
NOTE 12- COMMITMENTS AND CONTINGENCIES (Continued)
3) On February 7, 1997, Alfred Hasler, Adrian Stanga, Lucie Vonesch and
Lloyd Kim, as plaintiffs, instituted an action in the Superior Court
of California, County of Santa Clara, against S. Allan Kline, a former
director of the Company (until January 17, 1997), Biomyne, Inc.
("Biomyne"), Biomyne Technology Company ("BTC"), Aurtex, Inc.
("Aurtex"), the Company, Biomyne Exploration Company ("BEC"), Biomyne
North Company ("BNC"), San Jose National Bank, Hugo Wyss and currently
unknown defendants. The Company, however, did not become aware of the
action until March 11, 1998 and has engaged California counsel to
defend it. In the complaint the four plaintiffs allege that they are
limited partners of BEC and, in the case of Mr. Hasler, also a limited
partner of BTC, and that their sixteen causes of action (of which four
include Sector as a defendant) arise from their investments on one or
both limited partnerships. In the third cause of action, plaintiffs
allege that in 1989 BEC solicited limited partnerships interests and
represented that the funds would be used for drilling for gold on BEC
claims in Nevada and instead diverted the funds to BNC for the
development of BNC's claims in Idaho. Plaintiffs, who allegedly
invested $300,000 in BEC, seek $3,000,000 in damages for the benefits
and profits they were not able to derive from the Idaho claims.
Plaintiffs allege earlier in the complaint and in the fourth cause of
action that Biomyne sold the Idaho claims to Aurtex, which they
believe was acquired by the Company, but in fact is the Company by its
former name as correctly alleged in the seventh cause of action. In
the fourth cause of action, plaintiffs are seeking over $3,000,000 in
damages as the value of the shares in the Company to which they
believe they are entitled. In the seventh cause of action, plaintiffs
seek punitive damages for not delivering the shares to them. In the
fourteenth cause of action, the plaintiffs seek damages for not
delivering the shares to them. In the fourteenth cause of action, the
plaintiffs seek damages in excess of $3,000,000 plus punitive damages
as a result of the defendants intentionally not delivering the shares
resulting from the transfer by Biomyne to the Company. The Company, on
June 2, 1998, answered the complaint denying any liability and
pleading twelve affirmative defenses. Based on its current knowledge,
management is of the opinion that, if any liability can be established
by the plaintiffs, it is that of the other defendants and not that of
the Company.
The complaint was dismissed without prejudice as to the Company in
February 2000.
F-21
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
NOTE 12- COMMITMENTS AND CONTINGENCIES (Continued)
4) During the 3rd quarter of 1997, an action was filed by the Lodestone
Group Inc. ("Lodestone") in the District Court of Arapahoe County,
Colorado. The suit claims approximately $42,000 is owned to Lodestone
by the Company for work performed pursuant to a contract between
Lodestone and the Company wherein Lodestone was to manage the
administration of various exploratory activities with respect to the
mining claims of the Company in Idaho. The amounts billed are, in the
belief of the Company, far in excess of the contractually stipulated
amount and that there was no corporate authorization for any
additional work to be performed by Lodestone. In the opinion of
management, the suit is without merit and its outcome will have no
materially adverse impact on the Company. Judgment was rendered
against the Company for approximately $42,000, plus costs and fees, in
September 1998. The parties settled for $15,000 on March 30, 2000.
5) A former employee of Ideous filed suit against Ideous for wrongful
termination. Judgment was entered against Ideous in the amount of
$110,850. An appeal is pending. The full amount has been accrued in
the financial statements.
6) An individual has filed suit against the Company, also naming
Worldwide Plumbing Supply, Inc. ("Worldwide") and Allan Kline. The
suit alleges that Mr. Kline represented that he was the Prisident of
Sector and would sell 35,000 shares of Company Common Stock to the
plaintiff for $20,000. The plaintiff also alleges that Mr. Kline told
the plaintiff that Worldwide was the parent of Sector. The plaintiff
issued a check to Worldwide and it was cashed. Worldwide has filed an
answer. The Company maintains that it has no knowledge of Worldwide
and that Allan Kline is not the President of Sector. The Company
denies each allegation, believes the suit as it relates to the Company
is without merit, and intends to defend itself vigorously. The
plaintiff seeks the return of $20,000.
7) Agricola Metals, Inc. filed a suit against the Company seeking
$31,136. The plaintiff alleges that it had a consulting contract with
the Company and is owed this amount pursuant to said contract. The
Company has filed an answer and denies each and every allegation.
F-22
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
NOTE 12- COMMITMENTS AND CONTINGENCIES (Continued)
8) Dependence on major customers
------------------------------
The Company currently provides services to a limited base of 9
customers and therefore relies heavily on the business from each.
Sector BG's five largest customers accounted for greater than 80% of
total revenues for the year ended February 29, 2000. No single
customer, however, accounted for more than 50% of all revenues
generated. Sector BG is actively working to retain its customer base
and diversify the types of services that it provides in order to
reduce the dependence on any single customer or type of service.
Additionally, Ideous has two customers which account for 57% of its
accounts receivable at February 29, 2000.
NOTE 13 - EARNINGS PER SHARE
Securities that could potentially dilute basic earnings per share in
the future that were not included in the computation of diluted
earnings per share because their effect would have been antidilutive
are as follows:
February 29, February 28,
2000 1999
----------- -----------
Warrants 30,000 180,000
Options 5,312,458 3,311,000
----------- ---------
Total Shares 5,342,458 3,491,000
========= ===========
NOTE 14 - GOING CONCERN
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As of February
29, 2000, the Company has a working capital deficit of $1,874,032 and
an accumulated deficit of $15,748,015. Based upon the Company's plan
of operation, the Company estimates that existing resources, together
with funds generated from operations will not be sufficient to fund
the Company's working capital. The Company is actively seeking
additional equity financing. There can be no assurances that
sufficient financing will be available on terms acceptable to the
Company or at all. If the Company is unable to obtain such financing,
the Company will be forced to scale back operations which would have
an adverse effect on the Company's financial conditions and results of
operation.
F-23
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
NOTE 15 - SEGMENT INFORMATION
The Company's foreign operations are conducted by Global, Sector
Bulgaria and Ideous.
Years Ended
----------------------------
February 29, February 28,
2000 1999
-------------- -------------
Revenues from external customers:
Telecommunications $ 577,239 $ 652,505
Software 613,179 703,863
------------- -------------
$ 1,190,418 $ 1,356,368
============= =============
Interest expense:
Corporate $ 75,231 $ 120,482
============= =============
Depreciation and amortization:
Telecommunications $ 232,435 $ 335,367
Software 12,901 485,928
Corporate 7,716 20,000
------------- -------------
$ 253,052 $ 841,295
=============== ============
Segment profit (loss) before taxes:
Telecommunications $ (164,214) $ ( 244,434)
Software 116,700 (5,522,592)
Corporate (336,027) ( 352,835)
------------- -------------
$ (383,541) $ (6,119,861)
============== =============
Segment assets:
Telecommunications $ 356,372 $ 613,450
Software 401,102 453,135
Corporate 80,050 131,624
------------- -------------
$ 837,524 $ 1,198,209
============= =============
Expenditure for segment assets:
Telecommunications $ 9,690 $ 121,020
Software 32,684 25,255
Corporate - -
------------- -------------
$ 42,374 $ 146,275
============= =============
F-24
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
NOTE 15- SEGMENT INFORMATION (Continued)
The following geographic area data for trade revenues is based on
product or service delivery location and property, plant, and
equipment is based on physical location.
Years Ended
----------------------------
February 29, February 28,
2000 1999
-------------- -------------
Revenues from external customers:
United States $ - $ -
Switzerland 613,179 703,863
Bulgaria 577,239 652,505
-------------- -------------
$ 1,190,418 $ 1,356,368
============== ==============
Segment assets:
Switzerland $ 401,102 $ 453,135
Bulgaria 356,372 613,450
United States 80,050 131,624
-------------- -------------
$ 837,524 $ 1,198,209
============= =============
F-25
<PAGE>
ITEM 7. Changes In and Disagreements With Accounting and Financial
Disclosure
Not applicable.
PART III
ITEM 8. Directors, Executive Officers, Promoters, and Control Persons:
Compliance With Section 16(a) of the Exchange Act
The following table lists the names, ages, and positions of the executive
officers and directors of the Company that served during the year ending
February 29, 2000. All officers and directors have been appointed to serve until
their successors are elected and qualified. Additional information regarding the
business experience, length of time served in each capacity, and other matters
relevant to each individual is set forth following the table.
Name Age Position
---- --- --------
Mohamed Hadid 51 Chairman of the Board of Directors
Andreas Tobler (resigned 6/22/99) 49 President, CEO, Director
Geoffrey A. Button (resigned 10/28/99)50 Director
Theodore J. Georgelas 53 Director
James Zelloe 40 Vice President, Secretary/Treasuer
Director
Roger Serrero 52 Director
Jeremy Schuster 36 Director
MOHAMED HADID has held a number of senior management positions with a portfolio
of companies, including being the Founding Co-Chairman of Global Communications
Group, and Co-Founder and Director of Voice Powered Technology. Mr. Hadid
formerly was the largest single owner of the Ritz Carlton Hotels, with
properties in Aspen, Colorado, Washington, D.C., Houston, Texas and New York.
Mr. Hadid has been responsible for the development of over seven million square
feet of commercial office buildings in the greater Washington, D.C. area, with
total value estimated to be in excess of U.S. $2.7 billion. As a former director
of Adams National Bank and Advisory Board Director of National Enterprise Bank,
Mr. Hadid was responsible for structuring over U.S. $200,000,000.00 in financing
for smallcap and emerging public companies. Mr. Hadid was formerly served as
interim Chairman of The Entertainment Internet, Inc. He also formerly served as
Managing Director of Emerald Capital Corporation. Mr. Hadid holds a Bachelor of
Science degree from North Carolina State University, and attended graduate
school at Massachusetts Institute of Technology. On November 8, 1999, Mr. Hadid
filed a voluntary petition in the U.S. Bankruptcy Court for the Central District
of California seeking relief relating personal matters.
25
<PAGE>
THEODORE J. GEORGELAS became President and Chief Executive Officer effective
January 17, 1996, and was elected as Chairman of the Board of Directors of the
Company at that time. In December 1997, Geoffrey Button assumed the roles and
responsibility of President and Chief Executive Officer. Mr. Georgelas has been
the Manager/Member of G & S International L.C. (developers of commercial,
retail, industrial and residential properties both domestically and
internationally) for at least the last six years. He serves on the Executive
Committee and Board of United Bankshares, Inc. He is a cofounder of a cellular
telephone business in Delaware and a cofounder of DBE Software, Inc., a software
company marketing a database utility programming tool.
JAMES ZELLOE is an attorney with the law firm of Kunnirickal and Zelloe. . He is
a member of the Bars of the Commonwealth of Virginia and the District of
Columbia. He received a BS in Business Administration with a major in Economics
from Virginia Polytechnic Institute and State Unuiversity in 1981. He was
enrolled in a joint MA in Economics/JD program at Catholic University in
Washington, D.C.. He received his JD from the Columbus School of Law in 1984.
During his tenure at the University, he was a teaching assistant with the
Economics department, where he also lectured on his economic articles. He has
had a law practice in the Washington Metropolitan area (Virginia/Washington,
D.C.) since 1984. He is also on the Board of Directors of The Entertainment
Internet. He has been a member of the Board of Directors and an Officer of
Sector since 1998.
ROGER SERRERO was elected Director on November 15, 1999. His term as director is
for one year or until the next election of directors by shareholders following
the expiration of the one year term.
Mr. Serrero brings a wealth of business experience and a broad base of
international contacts to Sector. Mr. Serrero serves as general manager of
international advertising for Paris Match magazine and publisher of Paris Match,
Elle, New Look, and Lue magazines in Switzerland. Mr. Serrero also serves as
Chairman of Switzerland's Intermedia.com, which is a private company.
JEREMY SCHUSTER was elected Director on November 5, 1999. His term as director
is for one year or until the next election of directors by shareholders
following the expiration of the one year term. Mr. Schuster is an attorney with
a strong background in business and the entertainment industry.
Mr. Schuster's client list includes the multimedia personalities that formed
Dragon's Lair, LLC - Don Bluth, Rick Dyer, and David Foster. Mr. Schuster has
also served as production counsel for independent film companies and currently
maintains an active bi-coastal state and Federal court litigation practice,
while representing corporations including Virtual Image Productions, Inc.,
TVNext.com, Inc., and Texas.com, LLC. Mr. Schuster also currently serves on the
Board of Directors of Virtual Image Productions, Inc. and The Entertainment
Internet, Inc. (TEI). TEI does not compete with the Company's business. Mr.
Schuster is also counsel and provides legal services to a number of "dot com"
companies (specifically including TVNext.com, a New Jersey and Delaware company,
which is currently developing interactive television and broadcast programs, and
Texas.com, which serves as a central resource or portal for vendors servicing
Texas visitors, conventions, etc.), none of which compete with the Company.
26
<PAGE>
Mr. Schuster graduated from Rochester Institute of Technology in 1986 with
Associate of Applied Science and Bachelor of Science degrees. He thereafter
received a Juris Doctor from Suffolk University School of Law. Mr. Schuster is a
member of the Orange County Peace Officers Association, the National Notary
Association, and the National Association of Flight Instructors.
For more than the past five years he has been employed as an attorney at law
under the firm name of Schuster & Associates.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than 10% of the
Company's Common Stock, to file with the Securities and Exchange Commission
initial reports of beneficial ownership and reports of changes in beneficial
ownership of Common Stock of the Company. Officers, directors and greater than
10% shareholders are required by the Securities and Exchange Commission to
furnish the Company with copies of all section 16(a) reports they file. To the
Company's knowledge, based solely on a review of the copies of such reports
furnished to the Company, all Section 16(a) filing requirements applicable to
its officers, directors and greater than 10% beneficial owners were complied
with for the year ended February 28, 1999.
27
<PAGE>
ITEM 10. Executive Compensation
The following table sets forth the compensation of the Chief Executive Officers
for the fiscal years ended February 29, 2000, 1999 and 1998.
Summary Compensation Table
Annual Compensation Long-term Compensation
--------------------- -------------------------
Restricted
Fiscal Salary/ Stock
Name Year Fees Bonus Awards (#) Options(#)
------------------ --------- ------------ ---- ---------- -----------
Theodore Georgelas 2000 $ 0 0 (5)
President 1999 (1) 40,000 0 75,000 30,000
Geoffrey Button 2000 0 0 (5)
CEO 1999 (2) 116,000 0 50,000 25,000
Andreas Tobler 2000 0 (5)
CEO 1999 (3) 30,000 0 750,000 150,000
Mohamed Hadid 2000 0 0 (5)
Chairman 1999 (4) 60,000 0 1,500,000 300,000
(1) For fiscal 1999, Mr. Georgelas' compensation consisted of a stock award of
75,000 shares valued at $3,000 (included in the Salary/Fees figure) and
30,000 common share stock options exercisable at $.0625 per share.
(2) Mr. Button served as President/CEO from September 1998 to June 1999. For
fiscal 1999, Mr. Button's compensation consisted of a stock award of 50,000
shares valued at $2,000 (included in the Salary/Fees figure) and 25,000
common share stock options exercisable at $.0625 per share. Mr. Button
resigned as President/CEO on September 4, 1998 but continued to serve as a
director until his resignation on October 28, 1999.
(3) Mr. Tobler served as CEO/President/Director from September 4, 1998 to June
1999. For fiscal 1999, Mr. Tobler's compensation consisted of a stock award
of 750,000 shares valued at $30,000 (included in the Salary/Fees figure)
and 150,000 common share stock options exercisable at $.0625 per share. Mr.
Tobler resigned as President/CEO/Director on June 22, 1999.
(4) For fiscal 1999, Mr. Hadid's compensation consisted of a stock award of
1,500,000 shares valued at $60,000 (included in the Salary/Fees figure) and
30,000 common share stock options exercisable at $.0625 per share.
(5) See also "Compensation to Directors" below for additional stock option
grants for compensation for services in fiscal 2000.
28
<PAGE>
Compensation to Directors
-------------------------
The following grants of stock options to purchase common stock were made to
directors of the Company during fiscal 2000 under the Company"s non-cash
compensation plan. No stock options have been exercised by any directors in
fiscal 2000.
Stock Options Granted
--------------------------------------
No of Shares
Date of Underlying Exercise Expiration
Director Grant Options Price Date
--------- -------- -------------- ---------- -----------
Theodore Georgelas 2/29/2000 804,860 $.03 - .04 3/1/05
Geoffrey A. Button 2/29/2000 179,860 $.03 - .04 3/1/05
Andreas Tobler (1) 2/29/2000 32,010 $.03 - .04 3/1/05
Mohamed Hadid 2/29/2000 54,860 $.03 - .04 3/1/05
James Zelloe 2/29/2000 804,860 $.03 - .04 3/1/05
(1) Mr. Tobler resigned as President/CEO/Director on June 22, 1999.
ITEM 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the Common Stock ownership information as of
February 29, 2000, and is adjusted for the reverse stock split, with respect to
(i) each person known to the Company to be the beneficial owner of more than 5%
of the Company's Common Stock; (ii) each director of the Company; and (iii) all
directors, executive officers and designated stockholders of the Company as a
group. This information as to beneficial ownership was furnished to the Company
by or on behalf of the persons named. Unless otherwise indicated, each has sole
voting and investment power with respect to the shares beneficially owned.
29
<PAGE>
Shares of Company Common Stock Beneficially Owned
-------------------------------------------------
Percentage
Beneficial Owner Number of Shares of Total (1)
---------------- ----------------- -------------
Cede & Co. 8,855,656(2) 51.5%
P.O. Box 20
Bowling Green Station
New York, NY 10004
Mohamed Hadid 1,854,860 (3) 9.7%
31305 Highway 82
Aspen, CO 81611
Theodore Georgelas 969,960 (4) 5.0%
7601 Lewinsville Road
Suite 250
McLean, VA 22102
James Zelloe 879,860 (5) 4.6%
203 W. Rosemont Ave.
Alexandria, VA 22301
Jeremy Schuster 0 *
5757 Wilshire Blvd., Suite 124
Los Angeles, CA 90036
Roger Serrero 0 *
7601 Lewinsville Road, Suite 250
McLean, Va. 22102
All Officers and Directors 3,704,680 (6) 19.3%
as a group (5 persons)
----------------------------------
* - represents less than 1%.
(1) Percentage of ownership is based on 17,193,805 shares of common stock
outstanding as of February 29, 2000. Percentage ownership for officers and
directors is based on 19,213,385 shares which includes shares which may be
acquired upon exercise of options held by the officers and directors
within 60 days of the filing of this report.
(2) Represents shares held in street name by various broker-dealers.
(3) Includes 354,860 shares which may be acquired upon exercise of options
within 60 days of the filing of this annual report.
30
<PAGE>
(4) Includes 834,860 shares which may be acquired upon exercise of options
within 60 days of the filing of this annual report.
(5) Includes 829,860 shares which may be acquired upon exercise of options
within 60 days of the filing of this annual report.
(6) Includes an aggregate 2,019,580 shares which may be acquired upon exercise
of options within 60 days of the filing of this annual report.
ITEM 12. Certain Relationships and Related Transactions
During the three month period ended November 30, 1996, the Company accrued
$80,000 for consulting fees incurred for services provided by MCG Management
Consulting Group, S.A. ("MCG"). This agreement was canceled on November 26,
1996. One of the principles of MCG was also a director of Sector AG and the
Chairman of the Board of Directors of Histech. This liability remains unpaid as
of February 28, 2000.
During fiscal 2000, the Company incurred legal expenses for litigation services
provided by Mr. Schuster in connection with the Hasler claims (See Item 3, Legal
Proceedings). At the time Mr. Schuster commenced performance of services, he was
neither a shareholder nor a director and provided services as outside counsel
only. Near the close of the Hasler case, Mr. Schuster was proposed for election
as a director; he accepted the position and has not billed the Company for any
other legal matters attended to by him. Mr. Schuster's litigation services were
provided on a discounted basis pursuant to an agreement negotiated by Mr. Hadid;
the fee agreement provides for conversion of any unpaid debt to stock. To date,
the Company has paid only $10,000 toward accrued legal fees, although it has
reimbursed Mr. Schuster for the majority of the out-of-pocket expenses incurred
from the Hasler claim. The Company expects to liquidate its debt to Mr. Schuster
through the issuance of its common stock, although it has not resolved the
amount to be issued therefor. The Company also expects to compensate Mr.
Schuster for his service as a director and the services he provided to bring the
Company's filing status current prior to the expiration of its eligibility to
trade on the NASD Over The Counter Bulletin Board and to prepare subsequent
filings. At the time of this filing, no stock or compensation has been received
by Mr. Schuster for director's or non-litigation services.
During fiscal 2000, the Company requested litigation services be provided by Mr.
Zelloe, who also serves as a director. No particular fee agreement was made and
the Company did not reflect for this reporting period any financial obligations
to Mr. Zelloe, other than for services as a director. The Company has not made a
specific plan to compensate Mr. Zelloe for his litigation services during the
past year, but expects to resolve that situation in the near future.
The Company has been advanced funds from stockholders, directors, officers,
employees and other related parties. These advances amount to $180,355 and
$182,891 at February 29,2000 and February 28, 1999, respectively.
31
<PAGE>
PART IV
ITEM 13. Exhibits and Reports on Form 8-K
(a) Reports on Form 8-K.
No Current Reports on Form 8-K were filed during the last quarter
of the fiscal year.
(b) Exhibits
Exhibit
Number Description
------- -----------
3.1 Certificate of Incorporation of the Company, as amended. (Incorporated
herein by reference to Exhibit 3.1 of the Registrant's Form 10-KSB for
the year ended February 28, 1993.)
3.2 Articles of Merger, amending the Registrant's Articles of
Incorporation. (Incorporated herein by reference to Exhibit 3.2 of the
Registrant's Form 10-KSB for the year ended February 28, 1993.)
3.3 Bylaws of the Company. (Incorporated herein by reference to Exhibit
3.3 of the Registrant's Form 10-KSB for the year ended February 28,
1993.)
10.1 1991 Stock Plan of the Company. (Incorporated herein by reference to
Exhibit 10.1 of the Registrant's Form 10-KSB for the year ended
February 28, 1993.)
10.2 1994 Stock Plan of the Company. (Incorporated herein by reference to
Exhibit 99 of the Registrant's Form S-8 Registration no. 33-76718,
dated March 18. 1994.)
27.1 Financial Data Schedule
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) to the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized on this 12th day of June, 2000.
SECTOR COMMUNICATIONS, INC.
BY: /s/ Mohamed Hadid
------------------------
Mohamed Hadid, Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
Date: June 12, 2000 /s/ Mohamed Hadid
-----------------------
Mohamed Hadid, Chairman
Date: June 12, 2000 /s/ Theodore Georgelas
-----------------------
President, Director
Date: June 12, 2000 /s/ James Zelloe
----------------
V.P.,Secretary/Treasurer, Director
Date: June 12, 2000 /s/ Jeremy Schuster
--------------------
Director
Date: June 12, 2000 /s/ Roger Serrero
--------------------
Director
33
<PAGE>
EXHIBIT INDEX
The following exhibits are filed herewith:
Exhibit
Number Description
------- -----------
27 Financial Data Schedule
34
